Two years ago, Shanghai Futures Exchange launched steel futures. During these two years, steel futures played a key role in pricing and reflecting changes of steel demand and supply.
In recent years, domestic steel industry witnessed severe challenges due to financial crisis and volatility of iron ore prices, bringing high risks to enterprises still adopt the traditional business model.
But some enterprises adapted themselves to volatile situation and ran well. For instance, Sichuan Chuanwei Group, a large scale private steelmaker in western China, chose to arrange for production activities via combining financial tools with enterprises'' operation.
Mr Wang Jing president of Chuanwei Group said that "We hedge money via steel futures to stabilize our production and lock in profits, on the other hand, we provide rebar for delivery of steel futures, improving market value of Chuanwei Group.
Mr Yang Nengzhong GM of trade office in Chuanwei Group said that they not only hedge money via buying and selling but also hedge for iron ore via buying rebar futures with a rate at 1.7:1, locking costs of iron ore. The latter hedging method is based on principle of similar species and substitution, avoiding risks from volatile iron ore prices. Yang also mentioned that futures can be used to guide spot production.
Statistics data showed that the settlement prices of rebar and wire rod benchmark contracts were closely linked with spot prices in Shanghai and Tianjin, with correlation coefficient at 0.8. Steel futures never touched rising and falling limits, with the largest fluctuating margin lower than the largest vibrated margin of spot prices in Shanghai and Tianjin, or CSI steel industry index during the same period. Steel futures being close to settlement month, its price was getting close to spot price.
In 2010, rebar futures successfully complete 12 deliveries, with the rate between delivery settlement price minus spot price in Shanghai market and spot price lower than 4%, reflecting the good convergence between futures and spot prices.
Analysts said that the launch of steel futures two years ago optimized steel pricing mechanism, providing risk management tool for steel producers, traders and consumers. Moreover, brand registration for delivery attracted those large-scale enterprises, propelling structure upgrading of enterprises.
Mr Shi Chunsheng vice GM of Yongan Futures pointed out that "Steel futures improved operation philosophy of enterprises." He said that many enterprises experienced a qualitative change via participation in futures hedging.
( Source: www.steelguru.com )